UK: Competitiveness

Lord Northbrook Excerpts

Tuesday 8th June 2010 Lords Chamber

[Lord Northbrook]

My Lords, we are all grateful to the noble Lord, Lord Levene of Portsoken, for introducing this short debate. First, I pay tribute to the former Minister, the noble Lord, Lord Myners, and to my noble friend Lady Noakes for encouraging a high standard of debate in the previous Parliament and for their legislative achievements, such as the Banking Bill, which did great credit to this House. I also warmly welcome the noble Lord, Lord Sassoon, in his new position. Like his predecessor, he brings great financial experience to our deliberations and a good grasp of matters political from his time at the Treasury. He will be an invaluable addition to the coalition.

To encourage a sound economic background to enable UK competitiveness to flourish, the coalition needs to get UK finances back on to a more even keel, which it is already starting to do. Without this, the cost of government and business borrowing could increase rapidly as markets worry about the state of the UK economy. You only have to look at Greece to see the consequences of delaying doing anything, and the Spanish situation is of concern, too. Taking a leaf out of the Canadian book in the 1990s seems to be the latest mantra and that seems a sensible one.

The latest edition of the IMD World Competitiveness Yearbook, which ranks the competitiveness of 58 economies on the basis of more than 300 criteria, puts the UK at number 22—down one place from last year. Five of the top 10 are from the Asia Pacific region. For the first time we are seeing the creation of a self-sufficient economic block of developing countries. They have money markets and technology that did not exist 10 years ago. The biggest loser is Europe. Only three old world countries, Switzerland, Sweden and Norway, broke into the IMD’s top 10 this year. The IMD attributes the old world's relatively poor showing to high levels of government debt, a weakening infrastructure and continued inefficiencies in European labour markets. Professor Garelli of the IMD stated that,

“obviously the UK is undergoing the uncertainties of the post election period but also faces the dual challenges of the huge financial cost of the crisis as well as the deindustrialization of its economy”.

The deindustrialisation means that the UK cannot suddenly change track and become a mass manufacturer as our labour costs are too high compared with the Far East and other relevant developing countries. We need to retain and develop our focus on specialist niche, higher value-added manufacturing. Like my noble friend Lady Noakes, on this front I strongly argue, even at this difficult time, against restrictions on capital allowances for manufacturers, which would be a short-term and retrogressive step. Will the Minister make the strongest representations to the Chancellor on this point?

One of our major economic strengths is in financial services, as other speakers have said, which has been demonstrated by the success of Lloyd’s. The noble Lord, Lord Levene, mentioned that last year. This area must be nurtured even after the banking crisis of the past few years. The balance that the Government must seek to achieve here is to combine the right amount of regulation—to avoid a repeat of the sub- prime crisis—with a regime that allows bank lending to recover. Capital adequacy of banks is crucial, but this regime must be agreed internationally, whereby UK banks are not put at a disadvantage to their global competitors. This is already proving to be a slow process.

Regulation is a key factor in other areas of the economy. Overregulation means that the UK will be at a disadvantage compared to other less regulated markets. However, a balance has to be kept to ensure that safety and quality standards are adhered to without gold-plating European rules and regulations.

Another area that the Government should focus on to make sure that the UK retains its competitiveness is tax rates. The Chancellor is correct to be considering reducing corporation tax. The proposed increase in national insurance for employees should be reversed as soon as possible, because it is an extra burden for business to bear against international competition.

Capital gains tax is another area that causes me, like my noble friend Lady Noakes, concern. The proposed hike in the rate will cause concern especially to the elderly, who need to resort to capital to fund their living expenses. This could also curtail the activities of those who previously had spare capital to fund start-up enterprises. I ask the Minister to use his influence to argue for a return of taper relief and/or indexation to soften the blow of this proposed hike. I should like to point out that while I am not opposed to a higher short-term gains tax within a year to avoid income being turned into capital, the rate should decrease, whereby after three years it should be about 25 per cent. High personal tax rates can discourage enterprise. I therefore hope that the coalition will reduce the 50 per cent top rate of tax as soon as possible.

In summary, like my noble friend Lady Noakes, I believe that regulation and tax are two of the most important areas in encouraging the UK to maintain its competitive advantage.